What Gross/Net Yield is Ideal For Positive Cash Flow?
When investing in positive cash flow what net or gross yield is ideal and what other figures are important to look at?
Ryan: When purchasing a property with a goal of positive cashflow what net yield spread is your ideal target assuming capital growth’s not your priority?
Well I guess we’ve already talked about how we also want capital growth so we won’t harp on about that. But I think net yield, I don’t know.
Ben: Net yield?
Ryan: So net yield is after expenses right? So we want … I don’t know.
Ben: To get a net yield of 5% like you’re really looking at an 8% return at least.
Ben: So, I target gross yields of about 7% if I’m considering investing for cashflow. There’s yields significantly above that in different types of property around Australia but just not in areas where I’d like to personally own it.
Ryan: But I think …
Ben: 7, I think 7% gross is like a good starting point that will at least cover your costs.
Ryan: Yeah. I always look at gross yield when looking at properties as like a first point of call but I would never make a decision based on gross yield or even like net yield really because you’ve got to look at again like what your goals are and stuff like that.
Gross yield is generally just like such a simple figure that you can easily like cancel out properties. So say it’s 7%, anything below that you can cancel it out but depending on like the value of the property, that affects how much yield you need to get the amount of cashflow that you want.
So I prefer to look at cash on cash return so how much money have I invested into this property, whether it be like the deposit plus renovations and stuff like that, and then what am I going to get as a percentage of that cash that I’m investing into that property and what am I going to get back, like how quickly am I going to get my deposit back from that property and look at that.
Gross yield is more a way just to cancel out properties that are never going to meet that cashflow criteria and it’s an easier way to do that. But with cheaper properties you need higher yields like so you’re looking at super cheap like 100 to 200 grand, you’d probably need over like 8% to get the positive cashflow that would be of interest to people.
But then as you get more expensive, if you’re looking at properties over a million dollars then you know because interest rates are so low you can get something with 6% and still end up positive cashflow. So it’s like depends on price point as well.
Ben: It’s funny like a question because I’ve been thinking about this a lot at the moment as you know like I’ve talked to you about it.
I just, I’m less yield focused and more just strategy focused if you know what I mean? Like I’m more interested in getting to X point of passive cashflow with the least risk, least path of resistance as opposed to just a need to own properties that achieve X, if you know what I mean?
Ben: So there’s so many different ways that you can increase yields that most people don’t think about. I won’t go into that stuff now but just you know like as Ryan said, like sometimes owning a 6 1/2% yield on a million dollar property you only need to own 1 1/2 of them to get your 100k per year versus owning you know 5 or 10 others that only ticking away at 10 grand per year type thing.
Ryan: Well that’s the thing, you can have a property that has a really high yield like 8 or 9%, but if it’s a really cheap property then like your [inaudible 00:03:11] rates tend to be a larger percentage of your rental income, maintenance might be a higher percentage of rental income, all that stuff sort of affects cashflow.
I’d never invest on yield alone, I would always look at all income and all expenses, cash on cash return, as well as how it fits into your strategy long term as well. That kind of finish that question you reckon?
Ben: Yeah, I think that’s good. Just cash on cash return isn’t like something that’s native to most people, but I think you explained it as well as it can be. Check it out on Google and figure out how to calculate it because it’s very powerful.
That’s all I think about is how quickly I can get my return on investment, not so much from a cashflow perspective but more from immediate equity on the way in from buying or equity traded within the first 12 months to make sure that my return on my cash is always 100% in the first 12 months.
Ryan: Yeah, well that’s the thing …
Ben: That takes time to be able to do that but it’s 100% possible.
Ryan: Well then you’re playing, they call it like playing with the house money or you can go again. So like an example would be, if you go into a casino with a 100 bucks and you put it on the, I don’t advise this, but like let’s say you put it on red on roulette and like it comes up and so you double your money, 200 bucks.
You then put your 100 dollars back in your pocket and you’re now playing, they call it playing with house money because you’ve won that money.
It’s kind of like that so you look at okay I’m investing X amount of dollars into this property in terms of deposit, in terms of stamp duty, in terms of mortgage and solicitor phase, like add everything up how much money have you put into a property and it’s like how quickly can I get that money out of the property so that I can then take that money and reinvest it again.
And then effectively that entire property is like house money, that sort of concept because you’ve already got your money back that you invested in it that’s now just going to hopefully tick away. It’s not the only way to look at it, but it’s a cool concept to think about.
Ben: And I think about that like I just think about the way that I used to invest, which was to leverage really hard and to keep pushing versus these days, thinking differently. So somebody just starting out it’s very very important to get your money back as quickly as possible because it’s a lot easier to trade that money than it is to save it again.
In the early days of accumulation you need to accumulate quickly so that you can have the effect of compounding capital growth or rent returns over time, but when you get to a different phase which is more consolidation or just housekeeping phases, lifestyle phases, you know recycling that money is not as important to you, maintaining what you’ve got in an appropriate way becomes more important.
So at different stages of your cycle it becomes completely different how you look at these things as well.
Ryan: Yeah and what figures you use to determine whether or not a property is good for you now really depends on your situation and what your goals are.
Ryan: And there’s so many different ways you can look at it. Yield is a really crude one to look at.
Hey guys I hope that you enjoyed the answer to this question, which came from my live Q&A episode with Ben on YouTube. We will be doing more of these in the future.
If you want to check out Ben then he is offering free strategy sessions to On Property listeners. To find out more about that go to onproperty.com.au/session and you can see all the details over there. That’s it for today and until next time stay positive.